MasterCard profit slumps on $495 mln charge

AndrewR. Johnson

--Merchants argue MasterCard and Visa set rates at anticompetitive levels

--Excluding charge MasterCard EPS of $4.03 beat analysts' estimates

(Updated with details on merchant fees and lawsuits in paragraphs 7-12.)

MasterCard Inc.'s
MA, -1.17%
fourth-quarter profit tumbled as the credit card company took a sizable charge tied to pending litigation with U.S. merchants, although increased card spending helped it turn in core earnings ahead of expectations.

The lawsuits have been an overhang for MasterCard and chief rival Visa Inc. (V) of late as the card processors battle allegations that they have violated antitrust laws by fixing the fees retailers pay to accept their cards. A trial date for the cases has been set for September, although some analyst have speculated a settlement is likely to occur before then.

MasterCard on Thursday said it took the charge based upon the progress it has seen so far in mediation efforts.

MasterCard and Visa don't lend to customers but make money by processing card transactions for banks and merchants--a business that has been getting more lucrative, thanks in large part to consumers' continuing move to cards from cash and checks.

For the fourth quarter, spending on MasterCard-branded cards jumped 16% from a year earlier. Processed transactions climbed 23% and cross-border volumes were up 18%.

The company posted a profit of $19 million, or 15 cents a share, compared with $415 million, or $3.16 a share, a year earlier. Stripping out the $495 million after-tax charge tied to merchant litigation, MasterCard turned in a per-share profit of $4.03, topping the $3.91 expected by analysts polled by Thomson Reuters.

Net revenue rose 20% to $1.73 billion, matching analyst expectations.

The fees that merchants pay to accept credit and debit cards have been a contentious issue for the card industry. MasterCard and Visa are already adjusting to new federal rules that cap how much their bank partners can charge merchants to accept debit cards. The fees, known as interchange, are set by Visa and MasterCard but collected by the banks as revenue.

MasterCard could get a small lift in business from the rules because of provisions that also mandate banks add multiple processing networks to their debit cards. MasterCard has a smaller share of the debit-processing market than does Visa, which has exclusive processing deals with several of its banks. Those deals are prohibited under the processing rules, which take effect April 1.

The merchant lawsuits in question have been brought by retailers including Kroger Co.
KR, -0.78%
Payless ShoeSource and Safeway Inc.
SWY, +1.79%
as well as several trade groups. In addition to Visa and MasterCard, they also name several large banks that issue the processors' cards, including Bank of America Corp.
BAC, -0.33%
J.P. Morgan Chase & Co.
JPM, -0.68%
Wells Fargo & Co.
WFC, -0.78%
and Capital One Financial Corp.
COF, -0.99%

A settlement of the suits could cost $10 billion to $15 billion collectively and result in a temporary reduction of interchange fees for credit-card transactions, according to analysts at Jefferies Group. The fees merchants pay to accept credit cards were not affected by the new rules that took effect in October.

MasterCard would be responsible for 12% of the total settlement amount under agreements with Visa and several of its bank clients. Visa would be responsible for about 67% of the amount, though it would be protected from monetary damages under a plan set up as part of its 2008 initial public offering that essentially makes its bank partners responsible for the damages.

Shares were up 2.7% to $367.24 in premarket trade. The stock is down 4.1% since the start of the year.

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